Why are Managed Futures Considered Alternative Investments?
As an alternative to traditional investments tied to equity markets, managed futures are “alternative investments”.
Performance of Managed Futures products are based on skill of the portfolio manager and their product design, which are quite different both in construction and performance than that of most traditional investment strategies which “buy and hold” stocks, bonds or real estate.
Managed Futures strategies can be:
- Divergent vs convergent
- Systematic vs discretionary
- Technical vs fundamental
- Diversified vs focused
What Are Key Aspects of a Quality Managed Futures Program?
There are many aspects of a quality Managed Futures program. The aspects that matter most are dependent on the program’s role in the client’s overall investment portfolio. But, all Managed Futures strategies should include the following key aspects as a baseline:
Key program aspects should include:
- Disciplined approach
- Identifiable edge in the market
- Repeatable investment process
- Robust risk management
- Ongoing research to prevent alpha decay
- Avoidance of curve fitting
How Do Managed Futures Help Create a Balanced Portfolio?
Managed Futures help create a balanced portfolio because they offer portfolio diversification. They can profit both in risk-on and risk-off environments. As such, they may exhibit risk mitigation, crisis offset or crisis alpha characteristics.
What are the main reasons institutional investors should consider Managed Futures?
Institutional investors should consider managed futures in order to diversify their portfolio, even if it already includes other alternative investments. Many other alternative investments, while offering a diversified return stream in a risk-on environment, tend to correlate more to stocks during a risk-off environment. Managed Futures strategies like trend following can benefit from higher market volatility because of their long gamma return profile which results in the so-called CTA smile. Other Managed Futures strategies like short-term strategies which use volatility break-out systems can benefit from volatility expansion periods, providing a long volatility return profile. Some Managed Futures strategy like alternative risk premia (such as value, carry, and momentum) provide exploitable sources of returns and are different than the traditional risk premia or beta strategies like long-only equities.
What key benefits do separately managed accounts hold for institutional investors?
- Daily liquidity (no lock-ups)
- Leverage through notional funding
- Account ownership remains in client name
If I wanted to compare CTAs and view manager profiles and programs, where can I go?
Investors can review manager profiles, programs, and strategies in the Coquest CTA Database:
What questions should an institutional investor ask when selecting a CTA for alternative investing?
Institutional investors should have a proper due diligence process, including both investment due diligence and operational due diligence to select a CTA. During the investment due diligence, they should be able to identify the strategy’s unique edge in the market, the repeatability of the sound investment process, a disciplined robust risk management process and an ongoing research process which avoids curve fitting. The operational due diligence should review the soundness of the management firm, the reputation of the principals, the separation of duties between the investment, operational and risk management processes.
How do Commodity Trading Advisors report their performance to the Coquest CTA Database?
CTAs report their monthly performance updates to Coquest by emailing firstname.lastname@example.org.
How have managed futures grown in popularity over the years?
Managed Futures have grown in popularity over the years mostly because of their diversification characteristic and, to some degree, because of their potential for being a risk mitigator within investor portfolios.